Getting implementation right: Assessing the payment service banking guidelines

In recognition of the fact that efforts towards improving access to financial services have not had the desired impact, the Central Bank of Nigeria (CBN) has decided to adopt a new approach that holds significant potential. Payment Service Banking, if executed and managed successfully, could be the key drivers in helping Nigeria achieve its national financial inclusion strategy goal of 80% inclusion by 2020.

Essentially, the payment service banking license enables non-banks across the country to obtain a license to operate in the financial sector. These organisations — which can include telecommunications companies, retail chains, postal and courier service companies, mobile money operators, and financial technology organisations — will provide remittance services, micro-savings and withdrawal services.

The guidelines, as published by the CBN — in an exposure draft on October 5, and a formalised publication on November 2 — enable these organisations to leverage technology to reach rural communities. The acquisition of a PSB license is based on the organisation’s ability and willingness to pay an application fee of N500,000 as well as a non-refundable licensing fee of N2 million, and to have a minimum capital requirement of N5 billion. The financial requirement eliminates a vast amount of organisations, but will likely drive increased partnerships and collaboration to enable smaller organisations to participate.

Organisations seeking to obtain the PSB license will also be required to operate in rural and unbanked areas, with a minimum of 25% of their total touch-points located in these areas; and can deploy ATMs and Point-of-Sale devices; can operate through banking agents; roll-out their own agent networks; and set up consumer use electronic and technology-driven platforms to reach the unbanked.

The release of the guidelines is an important step, but being clear that they will deliver on their objectives is now equally, if not more, important. The successful implementation of payment service banking is dependent on three critical factors — how well it serves the purpose of including the unbanked and underserved customers into the financial system; how widely the model is adopted by eligible organisations; and how effectively PSBs are enabled to grow and expand, and to serve the purpose for which they were designed. We asked a range of stakeholders to indicate what they think might be the most contentious content of the guidelines, and three particular areas were clearly of most concern.

Firstly, the guidelines propose a structure wherein the name of a PSB shall not include any word that links it to its parent company. This could prove problematic for license-holders in drawing in already-skeptical excluded individuals. Financial services are about trust, and most often, familiarity with the name of an organisation and its various associations breed a significant level of trust with end-users and potential customers. The names of organisations carry years of legacy and history, and important association developments amongst their existing and target audiences. These excluded low-income earners have a high-sensitivity to financial services, and this lessened level of trust could stifle adoption or worse, destroy the potential for take-off. The cost of working to establish a new name in the minds of desired audiences could equally result in organisation’s eligible for the license opting-out. Based on this, it’s important to understand the rationale and intention behind the requirement, and so assess whether the benefits of its inclusion, outweigh the impact that it might have on roll out.

Another issue presents itself in the potential sustainability of the PSBs, given their limited revenue options. One of the conditions presented in the guidelines prevents payment service banks from granting loans or payment advances to customers. However, this clause defeats the mission to truly include the unbanked and underserved customers, as providing them with access to financial services goes beyond account opening, but rather includes all services which will empower them to take advantage of the benefits of our national financial systems. This certainly includes micro-loans. By excluding this from the service offerings of PSBs entirely, the attractiveness of the license for eligible players is significantly reduced, and the likely patronage of their services by customers are also reduced. The fact is, any effort to reduce financial inclusion needs to be truly holistic in order to be successful. While the clause limits both the direct and indirect provision of loans, an indirect means should be considered: PSBs working in partnership with licensed financial institutions could significantly strengthen efforts at making a real impact.

The third condition which could limit the effectiveness of PSBs is the requirement that they maintain a minimum of 75% of their deposit liability in CBN securities, T-bills and other short-term federal government debt instruments. While the need to effectively manage and ensure the security of customer’s deposits is paramount, this must not be to the detriment of the PSBs. Having PSBs invest the greater percentage of their deposit liability in low-yield investments could significantly limit their profitability, and in so doing, their continued growth. Investment requirements for micro-finance banks are capped at 10%, and this has proven successful; the same model should be applied to PSBs — investments capped at 25%, with all excess placed with deposit money banks, as proposed in a later clause within the guidelines.

This approach is yet to be tried and tested, and certainly there will likely be a number of hiccups before it is perfected, however, a review of these conditions in particular may be critical to enhancing the success of the PSB model. The guarantee that this approach does not go the way of Microfinance banking, Agent Banking, Tiered Know-Your-Customer Requirements and Mobile Money Operation (MMO), is the ability for the CBN to pay close consideration to conditions like these which may limit the full potential for organisations to play these new roles as effectively as possible. It is in all our interests, but most importantly, in the interest of the end users (the poorest in our society) for this to work.